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Make Money in Oil and Gas Exploration and Production the Easy Way

There's no need to guess which company will fare best.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the oil and gas industry to thrive due to our planet's growing demand for energy, the SPDR S&P Oil & Gas Exploration and Production ETF(NYSE: XOP) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basicsETFs often sport lower expense ratios than their mutual fund cousins. This oil and gas ETF's expense ratio -- its annual fee -- is a low 0.35%.

What's in it?Several of this ETF's components made strong contributions to its performance so far this year. Brigham Exploration(Nasdaq: BEXP), up 34% in 2011, has been profiting from Bakken shale oil. It's been the fastest-growing company in that field, and appears to be well run: When companies such as Abraxis Petroleum(Nasdaq: AXAS) were significantly slowed by bad weather last winter, Brigham was not. Fellow ETF holding GeoResources(Nasdaq: GEOI), up 15%, has also been doing well in the Bakken and enjoys fat profit margins.

Other companies haven't added as much to the ETF's returns in 2011 but could have an effect in the years to come. Northern Oil and Gas(AMEX: NOG) is down 16% this year. Yet it has been posting explosive growth in revenue and earnings, has been very successful with its drilling, and has many acres left to develop in Bakken and elsewhere. McMoRan Exploration(NYSE: MMR), down 15%, has some worried about its focus on Gulf of Mexico exploration.

The big pictureDemand for oil and gas isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian